Sept. 30 (Bloomberg) -- New Zealand’s credit rating was cut one step to AA by Fitch Ratings, which cited the southern Pacific nation’s high level of debt and persistent current account deficit.
The outlook is stable after the rating was reduced from AA+, Fitch said yesterday in a statement. Yields on 10-year notes rose two basis points, or 0.02 percentage point, to 4.31 percent. New Zealand’s dollar erased an earlier gain versus its U.S. counterpart, slumping 1.2 percent to 76.71 per dollar.
The country’s net external debt of 83 percent of gross domestic product in U.S. dollar terms at the end of last year compares with 10 percent for the median of AA-rated nations, Fitch said. The current account deficit, or the amount of imports that exceed exports, is likely to widen to 4.9 percent in 2012 and to 5.5 percent the next year, the firm said.
“New Zealand’s high level of net external debt is an outlier among rated peers -- a key vulnerability that is likely to persist as the current account deficit is projected to widen again,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said in the statement. Even so, the country “remains well-placed among the world’s highly-rated sovereign credits.”
New Zealand’s ranking was cut in part because the sustained shift in the domestic savings to investment ratio required to narrow the current account deficit is “unlikely within the forecast period,” Fitch said. The country’s 150 percent household indebtedness relative to disposable income compares with 157 percent in Australia, 159 percent in the U.K. and 116 percent in the U.S.
The nation’s 0.7 percent five-year average growth in gross domestic product “compares unfavorably” with that of 1.1 percent for AA-rated nations and 1.4 percent for those ranked AAA, Fitch said.
Public finances have deteriorated over the past three years, eroding what has traditionally been a ratings strength for New Zealand, Fitch said. The debt to GDP ratio of 46 percent in 2011 is similar to the AA median of 43 percent and the ratio of debt to revenues has risen in line with the AA rating median to 122 percent, it said.
With non-residents holding more than half of New Zealand’s marketable government debt, the country’s “own funding conditions may not be isolated from any materialization of risks in external finances,” Fitch said. However, it said the risk of “such a downside scenario remains remote.”
--Editors: Kevin Costelloe, Gail DeGeorge
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